HUL Q3 results: Demonetisation hurts but input costs a bigger worry

Demonetisation did not have a catastrophic impact on Hindustan Unilever Ltd’s (HUL’s) December quarter performance. Sure, its domestic consumer business did decline by 4% in volume terms over a year ago but that was not all due to the currency ban. A second consecutive quarter of price hikes in the soaps business continued to affect sales. The company management said in a conference call that a large part of the decline in the personal care segment was due to the soaps business.

Among its main segments, personal care was the only one whose sales fell. Its sales fell by 2.7%, compared to a decline of 0.3% in the September quarter. Others such as home care, foods and refreshments (tea and coffee) saw sales growth range from a low of 0.5% to 8.1%. Overall, the domestic consumer business value sales growth was zero as the decline in personal care cancelled out growth in the others.

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The good news is that the effect of demonetisation is waning. Consumers have been buying less per visit but are visiting shops more often. Rural markets are where the stress remains high. This will take its time to play out but HUL is trying to improve its own distribution reach, to lower its dependence on wholesale distribution. demonetisation’s impact, it would appear, should recede further in the March quarter. It depends on how consumer demand improves and to what extent stocking by trade channels returns to earlier levels.

A bigger problem, however, appears to be on input costs. Even with higher prices, the personal care segment still saw margins decline. HUL expects to take more price hikes to combat the rather sharp rise in vegetable oil prices. The hit on volume sales growth may continue for some more time, due to a sustained increase in prices. Margins declined across segments too, but the company said the slowdown due to demonetisation affected its operating leverage, or the ability to spread fixed costs over a higher sales base.

Profitability took a hit as a result, with its material costs as a percentage of sales rising by 64 basis points over a year ago, but it did fall sequentially. Advertising costs moderated from a year ago. HUL’s Ebitda (earnings before interest, tax, depreciation and amortization) margin fell by 83 basis points from a year ago and by 32 basis points sequentially. Ebitda fell by 5.2% against a year ago. A basis point is 0.01%.

With crude oil prices rising as well, firms could see a bigger basket of inputs getting expensive. Packaging costs could rise too. A weak market calls for a graded approach in passing on higher costs. A decline in volumes, especially in mass consumption products such as soaps, owing to higher prices, is not an encouraging sign for a consumer company. The hope then is that the relatively better showing in the more premium products helps along overall growth.

HUL’s share trades, expensive as ever, at 37 times its estimated FY18 earnings per share, according to estimates of analysts polled by Reuters. Its share has declined since September but has perked up since end-December. In the near term, events such as the budget and goods and services tax rates could move it either way but longer term, a recovery in consumption and pricing power are the missing ingredients for it to do well.